Why the feds want to block the U.S. Airways-American Airlines mega-merger

CarmelLobello

The CEOs of American Airlines and US Airways may have to rein in their excitement. Donna McWilliam/Getty Images

August 13, 2013

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After ten straight years of giant airline mergers, the federal government is putting its foot down over a deal to combine US Airways and American Airlines into the largest airline in the world.

On Tuesday, the Department of Justice, joined by the attorneys general from six states, filed suit to prevent the $11 billion merger, saying it wouldresult in higher fees and less services for passengers, and squeeze out competition in local markets. At Ronald Reagan Washington National Airport, for example, the mega-airline would control 69 percent of takeoff and landing slots, according to the DOJ.

Though the DOJ has made a renewed push to aggressively pursue anti-trust cases, the latest suit comes as a surprise. Not only had European regulators already approved the deal, but the DOJ has been green-lighting airline mergers and acquisitions for the last decade, with very few snags. US Airways merged with America West Airlines in 2005; Delta acquired Northwest Airlines in 2010; and United merged with Continental in 2011.

So what makes this one different? At the time of those mergers, the airline industry was hemmoraging money, and the deals were seen as necessary for survival. Now, airlines for the most part are back on track.

"If this merger goes forward, even a small increase in the price of airline tickets, checked bags or flight change fees would result in hundreds of millions of dollars of harm to American consumers," said Bill Baer, assistant attorney general in charge of the DOJ's antitrust division. "Both airlines have stated they can succeed on a standalone basis and consumers deserve the benefit of that continuing competitive dynamic."

This is patently untrue, says Todd Robberson at Dallas Morning News. American Airlines is still in chapter 11 bankruptcy proceedings. "Without this merger, American will become a radically reduced airline, and passengers will suffer substantially," he says.

Would the merger reduce competition? Well, it certainly would reduce competition between U.S. Airways and American, but the resulting, unified airline would still have to compete with other major airlines and, especially, Southwest Airlines. If Southwest continues to offer lower fares to the cities where American flies, the new airline will not be able to compete. [Dallas Morning News]

The airline industry agrees, arguing that the presence of Delta and United make a third behemoth necessary. Dennis Tajer, spokesman for the Allied Pilots Association, told The Wall Street Journal that if the Department of Justice blocks this merger, it will have "bolstered the duopoly of Delta and United," which would be "bad for travelers."

But there is some middle ground. Gina Chon from Quartz says the suit "means US Airways and American will have to offer more concessions, like giving up more take-off and landing slots at airports, to try to win approval, or risk losing the deal all together."

So all hope is not lost for US Airways and American, but if the merger goes through, it will cost more than they expected. And it will warn other companies planning a merger to rethink the concessions they will have to offer to get a deal approved. The regulators, it seems, are not bluffing. [Quartz]